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Pros and Cons of Declaring Bankruptcy under Chapter 7

There's no question that deciding whether to declare bankruptcy is very difficult. It affects your future credit, your reputation and your self-image. It can also improve your short-term quality of life considerably, as the calls and letters stop. Here is a list of pros and cons to consider as you decide whether Chapter 7 bankruptcy is the best option for you.

CONS PROS
Bankruptcy will ruin your credit for some time to come. A Chapter 7 bankruptcy can remian on your credit report for up to 10 years. Although a bankruptcy stays on your record for years, the time to complete the bankruptcy process under Chapter 7, from filing to relief from debt, takes only about 3-6 months. So, the trade-off is a lasting mark against your credit in exchange for freedom from most debt. If you decide against Chapter 7 when it may be the right decision for you, your missed debt payments, defaults, repossessions, and lawsuits will also hurt your credit, and may be more complicated to explain to a future lender than bankruptcy.
You will lose property that you own that is not exempt from sale by the bankruptcy trustee. You may lose some of your luxury possessions. Most state exemptions allow you enough so that most things you own will be exempt from bankruptcy, sometimes allowing more coverage to keep your property than you need. Additionally, you will get to keep the salary or wages you earn and the property you buy after you file for Chapter 7.
You will lose all your credit cards. Your credit cards probably got you in this mess to start with, so it's hard to see that as a bad thing. You may also be able to obtain new lines of credit within one to three years of filing bankruptcy, although at a much higher interest rate.
Bankruptcy will make it nearly impossible to get a mortgage, if you don't already have one There are lenders who specialize in lending to "bad risks," although that is an unfair characterization to make of someone who has taken a major step to solve financial difficulties.
Declaring bankruptcy now might make it harder to do later if something worse comes along. For instance, if you complete the bankruptcy process under Chapter 7, you cannot file for another Chapter 7 bankruptcy for six years. The six years is counted from the date you last filed for bankruptcy. Declaring bankruptcy now can get you started sooner on rebuilding your credit. Although, you can only file under Chapter 7 once every six years, you can always get a Chapter 13 plan if there is another disaster before you are entitled to file for Chapter 7 again. You may file for a Chapter 13 plan repeatedly, although each filing appears on your credit record.
Bankruptcy will not relieve you of your obligations to pay alimony and/or child support. Short of a court order from family court, nothing else will relieve you of your alimony and child support obligations. At least bankruptcy will alleviate many of your other financial obligations
Bankruptcy will not get rid of your student loan debt. Nothing will get rid of student loan debt, and at least bankruptcy will prevent your lenders from aggressive collection action.
You will have to explain to a judge or trustee how you got into a financial mess. Both judges and trustees have heard far worse stories than yours.
You cannot file for Chapter 7 bankruptcy if you previously went through bankruptcy proceedings under Chapter 7 or Chapter 13 within the last six years. If, however, you obtained a Chapter 13 discharge in good faith after paying at least 70% of your unsecured debts, the six-year bar does not apply.

You cannot file for Chapter 7 bankruptcy if a previous Chapter 7 or Chapter 13 case was dismissed within the past 180 days because:

  • you violated a court order, OR
  • you requested the dismissal after a creditor asked for relief from the automatic stay
You can avoid these harsh limitations against refiling for bankruptcy by observing all court orders and court rules, and by not asking to have your case dismissed when a creditor asks for relief from the stay. Even if these limitations apply to you, they don't last forever. You're only prevented from refiling for six months. It may make sense to at least consult with an attorney prior to filing for bankruptcy to avoid limiting your bankruptcy options in the future.
You may still be obligated to pay some of your debts, such as a mortgage lien, even after bankruptcy proceedings are completed. If you don't owe money on the type of debts that survive bankruptcy, the amount and number of debts that a bankruptcy court can relieve you from paying is potentially unlimited.
If you file for Chapter 7 relief, but you have a certain amount of disposable income, the bankruptcy court could convert your Chapter 7 case to a Chapter 13, thus changing your plan to be free from most debts within four to six months, to a plan requiring you to repay your debts over the course of three to five years. Chapter 7 does not require that you have debts of any particular amount in order to file for relief. However, even if your case gets converted to Chapter 13, it can still improve your financial situation by obtaining more favorable terms to pay off your debts. With Chapter 13, you get to keep all of your property as well.
Next Steps
Contact a qualified bankruptcy attorney to find out your options
for navigating the best path forward.
(e.g., Chicago, IL or 60611)

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